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Rating Action:

Moody's assigns a B3 CFR to Knowledge Universe, rates proposed LBO financing

28 Jul 2015

Approximately $925 million of debt securities rated

New York, July 28, 2015 -- Moody's Investors Service assigned a B3 corporate family rating and a B3-PD probability of default rating to KC Mergersub, Inc. ("Knowledge Universe"), a B1 rating to the company's proposed first lien senior secured credit facilities, consisting of $645 million term loan due 2022 and $80 million revolving credit facility due 2020, and a Caa1 rating to proposed $200 million second lien senior secured term loan due 2023. The rating outlook is stable.

Knowledge Universe has entered into a definitive agreement whereby Partners Group will acquire the company. The acquisition will be funded with the proceeds of the proposed first lien and second lien term loans and equity contributions from the sponsor and the management.

According to Moody's analyst Natalia Gluschuk, "While the LBO financing increases Knowledge Universe's debt levels dramatically, pro forma credit metrics and ensuing liquidity support the B3 rating."

The following rating actions were taken:

Issuer: KC Mergersub, Inc.

Corporate family rating, assigned a B3;

Probability of default rating, assigned a B3-PD;

Proposed $80 million first lien senior secured revolving credit facility due 2020, assigned a B1, LGD3;

Proposed $645 million first lien senior secured term loan due 2022, assigned a B1, LGD3;

Proposed $200 million second lien senior secured term loan due 2023, assigned a Caa1, LGD5;

The rating outlook is stable.

Issuer: Knowledge Universe Education LLC:

All of the company's existing ratings remain unchanged, and will be withdrawn upon closing of the transaction.

All ratings are subject to the execution of the transaction as currently proposed and Moody's review of final documentation. The instrument ratings are subject to change if the proposed capital structure is modified.

RATINGS RATIONALE

The B3 Corporate Family Rating (CFR) reflects Knowledge Universe's thin operating margins and modest free cash flow generation, along with the substantial increase in debt associated with the purchase of the company by Partners Group. Total debt will increase by $550 million, to $845 million, as a result of this transaction, resulting in pro forma debt to revenues of 56% and pro forma debt-to-EBITDA of approximately 5.1x (inclusive of Moody's standard adjustment for operating leases). While this level of leverage is solid for the rating category, the company's EBITA margin, estimated at approximately 9%, results in only modest free cash flow after a material level of capital spending, while interest coverage (EBITDA less capex to interest) of approximately 1.1x is more typical of B3-rated companies. The rating also reflects the volatile and cyclical nature of the child-care and education industry, which is dependent on macro-economic factors such as employment and demographic trends, the highly fragmented and competitive nature of the industry, and susceptibility to reductions in federal and state funding support. Furthermore, the company's rating is constrained by longer-term risks associated with potential shareholder enhancement activities given the private equity ownership. However, the rating is supported by the company's large scale within the child-care and education industry, broad geographical diversity within the U.S., and the value of its brands. Additionally, the rating considers improving general economic conditions and employment trends, modest growth in the company's same center sales and occupancy rates, and its on-going cost structure rationalization and real estate portfolio optimization initiatives that we expect to continue driving profitability improvements. Also supportive of the rating are favorable long term demographic fundamentals, including population growth and increasing percentage of dual income families.

The stable outlook reflects our view that favorable macro-economic trends, combined with modest growth in same center sales/occupancy rates and cost rationalization initiatives, will result in gradual improvement in the company's operating performance and credit metrics.

Knowledge Universe has an adequate liquidity profile, supported by the flexibility under springing maximum first lien net leverage covenant and an extended debt maturity profile. However, Moody's expects that the company will only generate moderate levels of free cash flow given high level of capital expenditures, which is a key constraint in our liquidity assessment. We also view availability under the new $80 million revolver, estimated at approximately $30 million after letter of credit utilization, as only modest for a company of this size.

The B1 rating on the first lien credit facilities benefits from the first priority interest in substantially all assets of the company and the guarantors, and the Caa1 rating on the second lien term loan reflects the loss absorption provided by this instrument in the capital structure.

The ratings could be upgraded if the company demonstrates same center revenue growth and improves operating margins such that EBITDA less capex to interest coverage exceeds 1.5x, free cash flow to debt is in the mid single-digit range, and adjusted debt-to-EBITDA is sustained below 5.0x. In addition, for a higher rating consideration, the company would need to demonstrate a substantial improvement in liquidity, characterized by strong and consistent free cash flow generation and a significant increase in revolver availability.

The ratings could be downgraded if the company experiences a deterioration in its operating performance or increase in leverage, possibly due to declines in same center sales, acquisitions or shareholder distributions. Debt-to-EBITDA sustained above 6.5x or a material weakening in the company's liquidity profile could also pressure ratings.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Knowledge Universe, based in Portland, Oregon, is a large scale for-profit provider of child-care and education services in the U.S. As of April 4, 2015, the company had a licensed capacity to serve 197,916 children from 6 weeks to 12 years of age in 39 states and the District of Columbia. The company operates approximately 1,393 community-based centers, about 415 school-partnership sites and over 94 employer-partnership centers under a number of recognized brands, including "KinderCare", "CCLC" and "Champions." Knowledge Universe is being acquired by Partners Group. In the last twelve months ending April 4, 2015, the company generated approximately $1.5 billion in revenues.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natalia Gluschuk
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns a B3 CFR to Knowledge Universe, rates proposed LBO financing
No Related Data.
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